A Secret Income Strategy to Generate Exceptional Investment Return

The percentages are huge, really huge: Microsoft (NASDAQ: MSFT) up 40,000%; Amazon.com (NASDAQ: AMZN) up 18,000%; even downtrodden Dell (NASDAQ: DELL) is up 17,000%.
The percentages refer to the price appreciation realized had an investor bought shares and held them to this day. A portfolio comprised of those three stocks alone, held since day one, would put every other investor’s portfolio return to shame.
That said, I must confess that my example is purely hypothetical. For every Microsoft, Amazon.com and Dell, there are hundreds, if not thousands, of Webvans, SyQuest Technologies and Savin Computers.
So the probability of having picked only Microsoft, Amazon.com, and Dell is miniscule. The probability is even more miniscule of having held each stock to this day.
The more likely – infinitely more likely – scenario is that you (and I) would have bought a Webvan, a SyQuest or a Savin. Keep in mind, we know what Microsoft, Amazon.com and Dell are today; we didn’t know what they would become in their infancy.
But as my hypothetical example demonstrates, there’s an obvious benefit to getting in at the start. Unfortunately, the benefit comes tethered to an obvious gargantuan risk of picking the wrong investments.
There is a secret income strategy – a more practical strategy that offers the potential for exceptional return – based on the same precept of “getting in at the start.” The strategy is safer than an IPO and is appropriate for income investors. This is important to me, because the strategy is appropriate for High Yield Wealth.
Getting in at the start means getting in at the start of an income stream – the start of a long stream of dividends and dividend increases.
I’ve written in the past on the benefits of investing in dividend growth. Exceptional wealth can be generated investing in stocks with long history of dividends and dividend increases.
Of course, every dividend-growth stock has a starting point for paying a dividend. Exceptional wealth isn’t generated by the history of dividend growth; it’s generated by accumulating the dividends that will be forthcoming.
That’s because the largest percentage increases frequently occur during the formative years. I liken the progression to a jet taking flight: The progression is initially steeply sloped, becoming less sloped in the ensuing years before finally leveling off.
Dividend initiators can generate exceptional total return, even when starting from a low payout and a low yield. Research from Copeland Capital Management reveals that the greater the annual dividend increases, the higher the total return.
The relationship is intriguing. Dividend growers in the fifth quintile – those that had average dividend increases less than 1% – generated an 8.6% average annual return.  Dividend growers in the first quintile – those that increased their dividend payout more than 13% annually – generated a 13.9% average annual return.
In short, the greater the annual dividend increase (in percentage terms), the greater the total return.

Relationship between Dividend Growth and Total Return

Source: Ned Davis Research/Copeland Capital Management

My own research is promising. I’ve found that the greatest percentage incremental dividend increases frequently occur during the early years. This tells me that getting in at the start and being the beneficiary of large incremental increases leads to superior total return.
The key is vetting and investing in stocks with the greatest potential for dividend growth. Yes, it’s informative to look back, but the future is what really matters.
As to be expected, potential dividend growth is associated with actual business growth. So it’s a good idea to narrow the field to growth stocks. The balance sheet also matters. Companies with low debt and high cash have higher dividend-growth potential than the opposite.
The June edition of High Yield Wealth features a company that recently initiated a dividend. Moreover, it has the characteristics I note above that lead me to believe it as the potential to become an exceptional dividend-growth company.
Dividend growth is a terrific investing strategy for income investors, but dividend initiation is the secret income strategy to exploit the dividend growth to its full potential. That’s why I look forward to adding more high-potential dividend initiators to the High Yield Wealth portfolio.

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